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Tue, May 15, 2001 EDT
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Sigh of Relief as Microsoft Meets Expectations
By Luis Cabrera   Associated Press
SEATTLE — Second-quarter earnings for Microsoft Corp. may have been unspectacular, but by meeting reduced expectations analysts believe investors will likely return to snap up shares of the software giant.

"It's not great," Goldman Sachs analyst Rick Sherlund said of Microsoft's 7 percent increase in net earnings. "But I think people are saying 'look, the bad news is already out there, and I think it's safe to own this one.' "

Microsoft reported net income of $2.62 billion, or 47 cents per share, on revenue of $6.59 billion for the quarter ended Dec. 31. For the same period last year, it reported profits of $2.44 billion, or 44 cents per share, on $6.11 billion in revenue.

Analysts surveyed by First Call/Thomson Financial had expected second-quarter earnings of 47 cents per share, down from earlier estimates of 49 cents. Estimates were lowered after the Redmond, Wash.-based company warned in December that it expected earnings to be down 5 or 6 percent from earlier expectations because of slumping PC sales.

Earnings were released at the close of markets, but after-hours investors gave Microsoft an immediate boost Thursday night. Shares increased to $59.19 after finishing regular trading on the Nasdaq Stock Market at $55.63.

"It's a bit of a relief rally," said analyst Scott McAdams of McAdams Wright Ragen in Seattle. "People are just saying thank goodness things weren't worse."

Microsoft's stock price plunged from a high of $116.06 in early 2000 to as low as $40.25 in December.

"Revenue came in a little higher than we had anticipated, so we were pleased with the performance to close the quarter," said John Connors, Microsoft chief financial officer, citing corporate contracts for the Windows 2000 operating system, among other items.

Microsoft, however, is retaining a cautious outlook over the next few months, Connors said. The company reduced third-quarter expectations to 42 or 43 cents per share; analysts had been expecting 44 cents per share.

The company expects revenue for the full fiscal year to be in the range of $25.2 billion to $25.4 billion, and earnings per share to be in the range of $1.80 to $1.82, right where analysts were predicting.

"The largest uncertainty is just the general state of the United States, and therefore the world economy and what that means for PC demand and technology spending in general," Connors said.

He also said the company would look to trim costs in all operations.

"There is fat within that organization, and it's fat because they make a lot of investments. They do a lot of things that may not pay dividends for several years," McAdams said.

Steve Kleynhans, an analyst with technology consulting firm Meta Group in Stamford, Conn., said there were few surprises in the report, since "retail sales of PCs weren't exactly barn-burners for the last quarter of last year."

For the six months ended Dec. 31, Microsoft had profits of $4.83 billion or 87 cents per share on revenues of $12.39 billion. In the year-ago period, it earned $4.63 billion or 84 cents per share on revenues of $11.50 billion.

Dwight Davis, an industry analyst with market research and consulting firm Summit Strategies in Kirkland, said Microsoft is depending in the short term on strengthening Windows 2000 server sales.

"I think that will happen as we go through this (calendar) year," he said. The operating system is pretty much a known quantity now, and there are a number of applications that are out there that are starting to exploit Windows 2000 capabilities."

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